Is Co-lending Changing the Credit Landscape in India?

The concept of co-lending has existed in the banking, financial services, and insurance (BFSI) sector for some time. However, the Reserve Bank of India (RBI) issued guidelines in November 2020 permitting non-banking financial companies (NBFCs) and banks to loan money to the underserved segments of the economy by leveraging the lower cost of funds from banks and the massive reach of the NBFCs.

For a growing modern economy like India, the co-lending model promptly provides access to financial products to every individual and business, which is necessary to maintain the current growth trajectory.

Understand how the co-lending model benefits lenders by minimising their risk and providing credit to consumers at lower interest rates and quick loan disbursal, which plays an important role in the economy’s growth.

The Rise of Alternative Modes of Payment 

Credit cards carry the negative connotation of being a debt trap in India, which has primarily been a debit card-driven market. However, this narrative has changed with growing credit card issuance in the last decade. Consumers’ changing mindsets and increased awareness of using credit cards and Buy Now, Pay Later (BNPL) for daily expenditure by the new-age startups further accelerates growth.

Unified Payments Interface (UPI) has risen as one of the most popular payment mechanisms in the country, showing impressive volume numbers compared to debit and credit cards. However, the value for all three modes of payment remains similar.

In the last few years, the credit sector has also seen significant contributions by neobanks like Jupiter and InstantPay.

A neobank is a tech company that provides banking services via a mobile app or website. The services may include transferring money electronically, paying bills, receiving direct deposits, and checking bank balances.

The Need for Co-lending in the Economy

Indian banking and financial services have been unable to bridge the significant gap in the formal credit sector, leaving many people underserved when it comes to credit. This provides lenders an opportunity and a challenge to meet the demands of this section.

With the rise of digital payments and innovation in the banking sector, it has become much easier to track individuals’ payments, cash flow, and credit scores beyond the formal sector’s reach. New fintech players have disrupted the market by introducing new and innovative financial products to consumers like credit cards, Buy-Now and Pay Later (BNPL), and credit EMIs in the underserved/unbanked segment, which were limited only to the home, auto, and personal loans before.

Problems That Co-lending Can Solve in the Indian Economy

Co-lending partnerships can significantly impact the fortunes of small businesses and customers throughout the country who do not have access to traditional forms of credit.

1. Liquidity Problems

Liquidity denotes financial institutions’ ability to fund their assets’ growth and meet financial obligations. As one of the world’s fastest-growing economies, India needs quick access to capital to meet its ever-growing needs. The fintech sector has played a pivotal role in bridging any gaps that might arise.

Co-lending creates a framework through which traditional banks can help close these gaps through innovative products and technologies by providing their lending strength and credibility to the NBFCs.

2. Systematic Stability

Systematic stability refers to the financial system’s capacity to reliably provide the loan intermediation and payment services required to maintain the economy’s current development course.

Co-lending guarantees a high level of standardisation, compliance, fiduciary care, and consumer protection. It is a collaboration between two regulated institutions — a bank and an NBFC. Borrowers are underwritten twice by two entities, and risk governance is a mutually reinforced exercise with adequate checks and balances.

Advantages of Co-lending to Different Stakeholders

New-age startups and fintech firms are disrupting the banking space by bringing technology into the traditional working model of a bank. Their varied benefits for banks, fintechs, and customers are listed below.

To Banks: 

1. Greater reach: Since fintechs and NBFCs can reach the economy’s remotest and most underserved groups, banks can get more customers and businesses to lend to.
2. Better customer experience: Fintechs rely on technology to manage customer interactions; the Big Data collected in this digitised era help banks identify the most profitable customers and provide them with repeat credit in the future.
3. Lower risk: Due to the risk division between banks and NBFCs, there is an added sense of security.

To Fintechs:

1. Credibility: New-age startups can gain brand credibility by collaborating with traditional banks.
2. Lower interest rates: Banks can help NBFCs by providing loans at a lower interest than their competitors.
3. Better capital utilisation: NBFCs can utilise their limited capital efficiently in the co-lending mechanism.

To Customers:

1. Better banking experience: Fintechs ensure that their customers get a better banking experience to retain them for a long-time.
2. Low-interest rates: Customers can avail of low-interest rates in borrowing.
3. Borrowing opportunities: Credit-underserved communities in rural areas with less documented credit history find it easier to access borrowing through the co-lending process.
4. Increase in financial knowledge: Banks and NBFCs offer a personal touch and educate the customer.

Choosing the Right Co-lending Partner

Apart from the obvious financial risks involved, co-lending arrangements should be considered with the utmost caution, as the other party’s actions could affect the entire brand image.

Some things to consider would be:

1. Focus area: The similarity of focus areas becomes important while entering into an arrangement.
2. Risk appetite: The potential partner must be willing to match your risk-taking capacity and willingness.
3. Ticket size: The average loan amount must be agreed upon while entering a co-lending arrangement to avoid future disputes.

The Bottom Line

Co-lending has evolved from a buzzword to being recognised by the RBI and is slated for country-wide implementation. Several startups and banks are collaborating to lend to niche segments of the economy.

In addition, co-lending comes with numerous risks. With non-performing assets (NPAs) constantly in the spotlight, co-lending arrangements must prove their robustness and fundamentals going forward.

This is where AI-powered platforms like Finezza can help automate the lending process through its wide variety of products, including:

1. Collection Delinquency Management
2. Bank Statement Analyser
3. Credit Bureau Data Analyser.

Finezza can make your banking and lending decisions efficient and accurate. Contact us to know more!